Jake Lawson here. When forming your LLC, you’ll face a choice that sounds more complicated than it actually is: member-managed or manager-managed? After helping over 1,200 entrepreneurs through this decision, I can tell you that 90% of small businesses should choose member-managed—and I’ll explain exactly why. But first, let me break down what this actually means in plain English.
The Bottom Line Up Front
A member-managed LLC means the owners (called “members”) run the day-to-day business themselves. There’s no separate management layer—if you own it, you manage it.
This is the default structure for most LLCs, and frankly, it’s what most small businesses should choose. It’s simple, straightforward, and doesn’t require hiring outside managers or creating complex governance structures.
Member-Managed vs Manager-Managed: The Simple Explanation
Think of it like this:
Member-Managed LLC (Most Common)
- The owners run the business
- Everyone who owns part of the company can make decisions
- Like a partnership where all partners are actively involved
Manager-Managed LLC (Less Common)
- Designated managers run the business
- Owners may or may not be involved in daily operations
- Like a corporation where shareholders hire executives
For most small businesses—especially single-member LLCs or partnerships between active business partners—member-managed is the obvious choice.
How Member-Managed LLCs Actually Work
In a member-managed LLC, every member (owner) has what I call “authority by default.” Here’s what that means:
What Every Member Can Do:
- Sign contracts on behalf of the LLC
- Make business decisions without consulting other members (unless your operating agreement says otherwise)
- Hire and fire employees
- Open bank accounts and handle finances
- Bind the LLC to agreements and commitments
- Represent the company in business dealings
What This Looks Like in Practice:
Single-Member LLC: You own 100% and make all decisions. Simple.
Two-Member LLC: Both partners can sign contracts, make decisions, and run operations. You’re both “in charge.”
Multi-Member LLC: All owners share management responsibilities and decision-making authority.
Who Can Be an LLC Member? (More Flexible Than You Think)
This is where LLCs get interesting compared to other business structures:
Individuals
- U.S. citizens and residents
- Foreign nationals (with some restrictions in certain states)
- Minors (though they may need guardians to act on their behalf)
Other Business Entities
- Other LLCs can own your LLC
- Corporations can be members
- Partnerships can own LLC interests
- Trusts can hold membership interests
No Limits on Number
- Single-member LLC: Just you
- Multi-member LLC: Unlimited number of owners
I’ve helped clients set up LLCs with everything from sole ownership to 50+ members. The structure scales based on your needs.
When Member-Managed Makes Perfect Sense
Based on my experience, member-managed works best for:
Single-Member LLCs (90% of My Clients)
If you own 100% of the business, member-managed is a no-brainer. You’re the only owner, so you’re automatically the only manager. Why complicate things?
Active Business Partnerships
When all owners plan to work in the business day-to-day, member-managed keeps things simple. No need to designate specific managers when everyone’s involved.
Small Family Businesses
Family LLCs often work best as member-managed, especially when multiple family members contribute to operations.
Service-Based Businesses
Consulting firms, law practices, medical practices, and similar professional services typically use member-managed structures.
When I Recommend Manager-Managed Instead
There are specific situations where manager-managed makes more sense:
Passive Investors
When some members are purely financial investors who don’t want operational involvement, manager-managed protects everyone by limiting who can bind the LLC.
Complex Ownership Structures
If you have silent partners, investor members, or complex equity arrangements, manager-managed provides clearer operational control.
Professional Management
When you’re hiring professional managers to run the business while you remain passive owners.
Lending Requirements
Some lenders prefer manager-managed structures for certain types of business loans.
The Legal Powers of Members in Member-Managed LLCs
Here’s what most formation guides don’t explain clearly—the actual legal authority members have:
Apparent Authority
Each member can bind the LLC in the ordinary course of business, even without explicit approval from other members. This is powerful but potentially dangerous.
Equal Management Rights
Unless your operating agreement says otherwise, all members have equal management rights regardless of ownership percentage.
Fiduciary Duties
Members owe fiduciary duties to the LLC and other members, including duties of loyalty and care.
Liability Protection
Being involved in management doesn’t eliminate your liability protection—that’s one of the key benefits of LLCs.
Setting Up Member-Managed Structure: The Practical Steps
Step 1: Choose During Formation
Most states ask about management structure on your Articles of Organization. Choose “member-managed” when filing.
Step 2: Document in Operating Agreement
Your operating agreement should clearly state the management structure and define each member’s specific roles and authorities.
Step 3: Consider Voting Rights
Decide how decisions will be made:
- Majority vote (most common)
- Unanimous consent (for major decisions)
- Proportional to ownership percentages
Step 4: Define Authority Limits
Consider setting limits on what individual members can do without group approval:
- Dollar thresholds for contracts
- Hiring/firing authority
- Major business decisions
Common Problems I See with Member-Managed LLCs
Problem 1: Unclear Decision-Making Authority
What happens: Partners assume they can make major decisions unilaterally
Solution: Clear operating agreement defining decision-making processes
Problem 2: Equal Management vs. Unequal Ownership
What happens: 10% owner has same management rights as 90% owner
Solution: Customize management rights based on ownership percentages
Problem 3: Conflicting Authority
What happens: Members make contradictory commitments to vendors or clients
Solution: Designate specific areas of responsibility for each member
Problem 4: No Exit Strategy
What happens: Members can’t agree on buying out departing partners
Solution: Buy-sell provisions in the operating agreement
State-Specific Considerations
Default Rules Vary
Some states default to member-managed, others require you to specify. Always check your state’s requirements.
Annual Report Requirements
Some states require you to list management structure on annual reports. Make sure you’re consistent.
Professional LLCs
Certain licensed professionals may have restrictions on management structures. Check with your state’s professional licensing board.
Changing Management Structure Later
Good news: you’re not locked into your initial choice.
The Process:
- Member vote to approve the change
- Amend the operating agreement to reflect new structure
- Update state filings if required (annual reports, amendments)
- Notify banks and lenders of the change
When Changes Make Sense:
- Bringing in passive investors
- Hiring professional management
- Simplifying complex structures
- Meeting lender requirements
Tax Implications of Member-Managed Structure
Here’s the important part: management structure doesn’t affect your tax treatment.
- Single-member LLCs: Still taxed as sole proprietorships (disregarded entities)
- Multi-member LLCs: Still taxed as partnerships
- Tax elections: You can still elect corporate taxation (S-Corp or C-Corp) regardless of management structure
The management choice is about operations and legal authority, not taxes.
Banking and Financing Considerations
Bank Account Setup
Most banks don’t care whether you’re member-managed or manager-managed, but they will want to know who has authority to:
- Sign checks
- Make deposits
- Access accounts online
- Apply for credit
Business Loans
Some lenders have preferences for management structure, especially for larger loans. They may want clear designation of who has authority to bind the LLC in loan documents.
Credit Applications
You’ll need to identify who has authority to sign credit applications and personally guarantee business debts.
My Recommendations by Business Type
Solo Entrepreneurs
Choose member-managed. You’re the only owner, so you’re automatically the manager. Keep it simple.
50/50 Partnerships
Choose member-managed. Both partners are likely active in the business, so shared management makes sense.
Investor + Operator Structures
Consider manager-managed. If one person puts up money and another runs operations, manager-managed provides clearer roles.
Family Businesses
Usually member-managed. Family members are typically active participants, though consider manager-managed if some family members are passive.
Professional Practices
Member-managed works well. Licensed professionals often need to maintain control, making member-managed the natural choice.
Frequently Asked Questions
“Can a member also be a manager in a manager-managed LLC?”
Absolutely. This person would be called a “managing member”—they’re both an owner and a designated manager. It’s actually quite common.
“What if members disagree on a major decision?”
Your operating agreement should address this. Common solutions include:
- Majority vote rules
- Tiebreaker mechanisms
- Required unanimous consent for major decisions
- Deadlock resolution procedures
“Can I change management structure without other members’ approval?”
No. Changing management structure requires member approval according to your operating agreement (typically majority or unanimous consent).
“Does member-managed mean all members have equal say?”
Not necessarily. Your operating agreement can allocate voting rights based on ownership percentages, investment amounts, or other criteria.
“What if a member acts beyond their authority?”
The LLC may still be bound by the action if the third party reasonably believed the member had authority. This is why clear authority limits in your operating agreement are crucial.
“Can members delegate their management duties?”
Generally yes, but the delegating member typically remains ultimately responsible. Check your operating agreement and state law for specific rules.
Red Flags to Avoid
Don’t Choose Based on Tax Reasons
Management structure doesn’t affect tax treatment. Choose based on operational needs, not tax considerations.
Don’t Ignore Authority Issues
If you have multiple members, clearly define who can do what. Avoid the “we’ll figure it out later” approach.
Don’t Assume Default Rules Work
State default rules for member-managed LLCs may not fit your situation. Customize through your operating agreement.
Don’t Forget About Future Changes
Your business will evolve. Make sure your operating agreement allows for management structure changes when needed.
The Bottom Line: Making the Right Choice
For most small businesses, member-managed is the right choice because:
- It’s simple and straightforward
- No need to designate separate managers
- All owners can participate in operations
- Lower administrative complexity
Choose manager-managed only if you have specific reasons:
- Passive investors who shouldn’t have management authority
- Professional managers who aren’t owners
- Lender requirements
- Complex ownership structures needing operational clarity
My general rule: Start with member-managed unless you have a compelling reason to choose manager-managed. You can always change later if your needs evolve.
The key is understanding that this choice affects who can legally bind your LLC and make business decisions. Get this right from the beginning, document it clearly in your operating agreement, and you’ll avoid most of the problems I see clients face later.
Need help deciding which management structure fits your specific situation? I’ve guided over 1,200 entrepreneurs through this exact decision. Every business is different, and what works for your competitor might not work for you. The goal is choosing the structure that fits your operational needs and growth plans, not just copying what others do.